Where Does the Inflation Rate Come From, Anyway?

By Michael Wolfson

The recent controversy about Statistics Canada’s plans to collect a range of detailed financial data has, understandably, focused on questions of privacy. But the role of a country’s national statistical agency has always been to balance the privacy concerns associated with collecting sensitive individual data with the many public goods produced from the statistical analysis of these data.

AS THE CHIEF Statistician has said in his recent media interviews, Statistics Canada has no interest whatsoever in the details of any specific Canadian’s life or activity. What StatsCan does want is to be able to pool the data from many individuals in order to produce anonymous and non-confidential statistics.

One of the most important of these statistics is the monthly inflation rate. If you ever wonder why your mortgage rate is what it is, the Governor of the Bank of Canada judges what recent inflation rates tell him about likely future inflation. The Bank’s monetary policy, which has a strong impact on mortgage (and many other) interest rates, is then highly dependent on these inflation rate expectations.

But measuring inflation is a complex process that requires very detailed data of two main kinds.

One is obvious: what is the price of a litre of gasoline today compared to last month or last year? In fact, StatsCan follows thousands of prices every month, from milk to shoes to car insurance to Netflix.

But Netflix and purchases from online vendors, like Amazon, have exploded onto the scene. It is a real challenge for StatsCan to track all these prices actually paid on essentially a real time basis.

The second major ingredient in measuring inflation, and specifically constructing the Consumer Price Index (CPI), is the mix of individual goods and services that make up Canadians’ average basket of purchases. For example, what is the percentage of Canadians’ consumption devoted to Netflix versus filling the gas tank?

Up to now, data on Canadians’ consumption baskets have been derived from StatsCan’s Survey of Household Spending (SHS) completed by a random sample of about 20,000 households each year. The survey was redesigned in 2010 to use more sophisticated methods and be less burdensome on respondents.

However, challenges in data quality remain; indeed, they are growing as more and more spending goes online. Another challenge concerns important new policy questions, such as the current proposal for a possible National Pharmacare program where it is important to know how much is being spent on over-thecounter versus prescription drugs, as well as on private drug insurance.

But this level of detail is getting beyond what the current SHS can provide.

Fortunately, there is an alternative source of data besides personal interviews: the detailed records being accumulated by financial intermediaries like banks, on all our electronic transactions. For StatsCan, accessing these data would cost far less than the survey and provide more accurate data.

Producing regular high-quality data on the inflation rate is one of StatsCan’s core outputs. It is a major public good used by many players in the economy, not just the Governor of the Bank of Canada. For seniors receiving OAS and families receiving the new Canada Child Benefit, these amounts are indexed to the CPI. So there is a very real trade-off – between privacy and public good. And the way that Parliament has mediated this trade-off is embodied in legislation, especially the Statistics Act and the Privacy Act. The result is that Statistics Canada is the Fort Knox of data in Canada.

Under the legislation, neither the courts, the RCMP, Canada Revenue Agency nor CSIS can access the data. Internally, StatsCan has designed its computer systems with all kinds of safeguards, and it is a criminal offense to use the data for any purpose other than statistics.

Certainly, with the continuing news of huge privacy breaches at private firms like Facebook, it is understandable that Canadians can become concerned about StatsCan seeking very detailed and sensitive financial data. But given the dramatic changes with ever more transactions being online, it is also clear that StatsCan needs to keep up with the times by increasing its use of these electronic data.

Canadians should be proud that we have such a professional, rigorous and high-quality statistical office.

Michael Wolfson is a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa and a Contributor with EvidenceNetwork.ca based at the University of Winnipeg. He was a Canada Research Chair at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada.